From Barron's:
America’s top 40 asset managers predict a grind in 2015.
What happens when asset managers believe that equities are still the best and perhaps only play in town, but that shares, particularly in the U.S., are close to being fully valued, and long-term bonds are risky? Answer: Cash positions spike, as wealth managers park money in cash or cash equivalents and wait for dips in the market before buying more stocks.“We think stocks are going to deliver reasonable returns. The problem is, you’re not going to get return from bonds, so we’ve put some risk mitigation into cash,” says Seth Masters, chief investment officer at Bernstein Global Wealth Management.There’s an important nuance here. The larger-than-normal liquid positions that we are spotting don’t mimic the defensive crouch seen in a recession. Rather, they are often cautious and temporary sideline holdings, awaiting the right buying opportunities.That, in essence, is where our 40 asset managers stood at the end of 2014, a story that can be found buried deep inside our asset-allocation table of America’s largest asset managers, on pages 28 and 29.
At first blush, allocations by the group of 40 haven’t changed much because of contradictory and uncertain views. Overall stock allocations average 51%, the same as a year ago, but U.S. stock holdings are up slightly, to 33% compared with 31% last year. Counterintuitively, with U.S. interest rates soon to rise, allocations in fixed income are also slightly higher this year -- at 27% versus 26% last year.But that’s our story: A good portion of those fixed-income holdings are due to asset managers quietly parking cash in “cash equivalent” short-term fixed-income instruments. Among them are a smattering of corporate bonds, commercial paper, and mortgage-backed securities, and a bigger proportion of asset-backed securities, such as those backed by consumer loans, mortgage-servicing fees, and communication-tower lease revenues.
JPMorgan Chase, Highmount Capital, Wilmington Trust, and Barclays are some of the wealth managers that have increased cash or cash-equivalent investments in this way. Consider Brown Brothers Harriman, which had 27% in cash and equivalents on hand at year-end 2014, by far the largest stash -- some to offset risk, but most on hand to deploy on market dips, says the firm’s chief investment strategist, Scott Clemons.Here is why Clemons’ cash position isn’t easy to spot in our table: Brown Brothers has just 3% in pure cash, but it has quietly shifted 24% of its portfolio into ultrashort-term instruments that are lumped into the firms’ fixed-income bucket.It’s an opportunistic holding. When the oil-price collapse triggered a fall in shares in early December, Brown Brothers added modestly to stockholdings. With cash levels still over 20%, Clemons said he is poised to pounce further into emerging markets, encouraged by temporary oil-price-induced weaknesses. Brown Brothers Harriman is not alone. Among other firms with cash embedded in their fixed-income allocations are Genspring, with 8% of its total portfolio; Atlantic Trust, with 9%; and Barclays, with 7%. It raises the question: Why?BLAME IT ON UNCERTAINTY. Wealth managers are all privy to the same data, but they’re coming up with very different conclusions about the meaning for investors. It’s a sign of abnormal times.“Earlier in the recovery cycle, people were more certain in their allocations and there was more uniformity in outlooks, but now everyone realizes growth isn’t bouncing back as it has historically,” says Bruce McCain, chief investment strategist at Key Private Bank. “Since you can’t frame what’s going on based on historical trends, you get a wider range of ideas about how to exploit what’s happening.”Barron’s annual asset-allocation survey typically finds strong majority opinions, such as last year’s 75% that backed an increase in foreign developed stocks. But in this year’s survey, for which data were gathered in December, only U.S. stocks got a thumbs up, with 56% of wealth managers recommending adding a touch more. In other asset classes, a roughly equal number of wealth managers were positive or negative....MORE
